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UNITED STATES v. RUSSELL ELEC. CO.

July 22, 1965

UNITED STATES of America, Plaintiff,
v.
RUSSELL ELECTRIC CO., Defendant


Cooper, District Judge.


The opinion of the court was delivered by: COOPER

COOPER, District Judge.

This is an action for money damages arising from an alleged breach of contract.

 Commenced July 6, 1959 by the filing of a complaint, issue was joined by service of an answer on September 4, 1959. The cause was tried before the Court and a jury on February 5, 8, 9 and 10, 1965.

 Defendant moved for a directed verdict at the close of plaintiff's case (Tr. 270). *fn1" After argument by both sides, this motion was denied (Tr. 270-296).

 At the close of the entire case, plaintiff and defendant agreed to waive jury trial of the fact issues (Tr. 383).

 Having rested, both sides moved for directed verdicts. Defendant moved for dismissal of the complaint on the entire record (Tr. 386). Decision on these motions was reserved pending submission of post-trial memoranda and proposed findings of fact and conclusions of law.

 FACTS

 The Contract

 In April, 1951, the United States of America, by its agent, the United States Naval Ordnance Plant at Indianapolis, Indiana (hereinafter NOP), solicited bids on Contract N163s-947 (hereinafter Contract 947) relating to gyro motors. These motors were to be used in a sighting unit which was being developed by NOP for use in fighter aircraft (Tr. 231-33). NOP received bids for Contract 947 as follows (Exs. 2-7): Company Unit Price John Oster Manufacturing Co. $30.20 Universal Electric Company 23.43 A. C. Gilbert Company 22.31 Redmond Company, Inc. 17.25 Russell Electric Company 14.12

 On or about May 14, 1951, NOP awarded Contract 947 to Russell Electric Company (hereinafter Russell). Russell's bid had been signed by William Lightfoot, its General Manager. Commander Lloyd B. Clapham, Jr. was the Contracting Officer for NOP (Ex. 2).

 Pursuant to Contract 947, Russell undertook to develop 5 sample motors to NOP's satisfaction before commencing production (Ex. 2, p. 2); furnish NOP manufacturing drawings (Ex. 2, p. 6); produce all special tooling necessary for the production of the motors (Ex. 2, p. 2); deliver the tooling to NOP "upon completion of the Contract" (Ex. 2, p. 5); and deliver 7,100 production motors no later than January 31, 1952 (Ex. 2, p. 6). Delivery of motors was scheduled as follows: 500 by August 15, 1951; 1,000 in September, 1951; and 1,500 per month thereafter until the full 7,100 motors had been delivered (Ex. 2, p. 6).

 The United States agreed, under Contract 947, to pay Russell $113,917 for the 7,100 gyro motors ($14.12 each), and $13,665 for the special tooling (Ex. 2, p. 2). As later modified, Contract 947 provided for payment by the United States of $133,881, including special tooling and 7,100 gyro motors ($14.11493 each).

 Termination, Reletting, Claimed Damages

 Section 11(a) of the General Provisions of Contract 947 (Ex. 2, pp. 13-14) provides:

 
11. DEFAULT
 
(a) The Government may * * by written Notice of Default to the Contractor terminate the whole or any part of this contract in any one of the following circumstances:
 
(i) if the Contractor fails to make delivery of the supplies or to perform the services within the time specified herein or any extension thereof; or
 
(ii) if the Contractor fails to perform any of the other provisions of this contract, or so fails to make progress as to endanger performance of this contract in accordance with its terms, and in either of these two circumstances does not cure such failure within a period of 10 days . . . after receipt of notice from the Contracting officer specifying such failure.

 On August 13, 1952, Redmond Manufacturing Co., Inc. (hereinafter Redmond) wrote Russell that it would no longer produce motors for Russell under Contract 947 as had been previously arranged *fn2" (Ex. 58). A copy of this letter was sent to NOP.

 NOP regarded performance under Contract 947 in danger. The need for motors was pressing (Tr. 135). It appeared delivery would not be forthcoming or, at best, unduly delayed. Accordingly, by letter dated August 22, 1952, the Contracting Officer, Commander Clapham, wrote Russell, advising (Ex. 61):

 
Deliveries of such supplies shall be cured and acceptable evidence that performance will not be delayed shall be furnished * * * within ten (10) days after receipt of this letter; if such is not done, the contract will be cancelled for default in accordance with Section 11(a)(ii) of the contract.

 Russell failed to reply to NOP's "warning" letter. Commander Clapham, under date of September 11, 1962, then wrote Russell (Ex. 62, Tr. 122):

 
* * * in accordance with Section 11, General Provisions, Contract N163s-947 is terminated for default, with respect to the undelivered balance * * * [specifying the items].

 Five bids were received (between September 8 and October 2) in response to NOP's solicitation of ten companies for price quotations on a replacement contract (Exs. 64-28, Tr. 128-69). Because Redmond offered the best delivery schedule and the Navy's need for the gyro motors was urgent, the Contracting Officer accepted Redmond's bid even though others had submitted lower quotations (Tr. 135). Russell interposes no claim that NOP should have accepted another bid (Tr. 239-42); 243-44; 300-02; see Tr. 135; Ex. 2, Article 11(c).

 At the time of termination, September 11, 1952, according to the Government, 6,935 motors remained to be delivered under Contract 947. It contends that as a result of administrative error, the replacement contract (Exhibit 63, Contract 163s-2261) entered into between NOP and Redmond on October 15, 1952, called for delivery of 6,768 gyro motors (Ex. 63, Tr. 126-27, see Exs. 64-68 at a unit price of $39.87.

 The United States, in this action, seeks to recover damages resulting from Russell's default under Contract 947 as measured by the difference between the cost under the replacement contract and what would have been the cost under Contract 947 had Russell not defaulted. The excess costs amount to a total of $180,745.96. *fn3"

 Relationship of the Parties

 As we see it, Russell contends that during the fall of 1951 it abandoned and repudiated Contract 947; NOP knew of the abandonment; NOP then had a duty to and could have, but completely failed to, mitigate damages; this requires a finding for defendant. Such a result, it is further advanced, would also be reached by the alternative argument that it was the Navy which caused Redmond to cease performing by August, 1952 and any breach of contract attributed to Russell was, at that time, the result of NOP's hindrance of performance and a further failure to mitigate damages. Russell also questions NOP's allocation of motors delivered by Redmond under gyro motor contracts other than 947 and the appropriate measure of damages.

 The Government, in brief, says it entered Contract 947 with Russell; Russell did not communicate to NOP any intent to abandon and repudiate the contract; rather, assurances of performance were forthcoming by Redmond, which "acted for Russell"; ultimately, after deliveries had begun, Redmond established itself as Russell's subcontractor, with NOP's consent; after Redmond's refusal to make further deliveries, Russell was given an opportunity to assume performance; absent such assurance, termination for default was proper; and Russell is thus liable for damages under the contract.

 At the heart of the controversy is the relationship between the parties and with Redmond. We thus turn to view the evidence (largely undisputed) as it bears on those relationships.

 1. May 1951 to February, 1952

 Contract 947 was awarded in mid-May, 1951. Russell, an Illinois corporation, was at that time a wholly owned subsidiary of Raytheon Manufacturing Company of Boston, Massachusetts. A manufacturer of fractional horsepower electric motors, Russell maintained a manufacturing plant in Chicago, Illinois (Tr. 83-84).

 On May 31, 1951, a Mr. Charles Frost purchased from Raytheon Manufacturing Company Russell's entire outstanding capital stock at a nominal price (Tr. 86). He arranged for an institutional financing company to acquire Russell's indebtedness to Raytheon (Tr. 83-84). This acquisition was secured by a mortgage on Russell's assets.

 Throughout 1951 and 1952, Mr. Frost also owned 30 percent, and his children an additional 14 percent, of the outstanding stock of Redmond, a Michigan corporation with offices and a manufacturing facility in Owosso, Michigan. Another 44 percent of Redmond's outstanding stock was owned by its President, Mr. Frank Campbell and his family. Redmond was a manufacturer, like Russell, of fractional horsepower electric motors.

 Sometime before September, 1951, Mr. Frost concluded that Russell had an inefficient organization and an incompetent staff. He had decided to discontinue its operations and liquidate certain of its assets (Tr. 96-97).

 At his request, Redmond executives during the summer of 1951 had made a study of Russell's business (Ex. 52; Tr. 96-97), Mr. Frost became aware that Russell had two contracts with the Navy, Contract 947 dealing with gyro motors and a two-part contract for development and production of a different motor called a "synchro".

 Concerned with completing these contracts, Mr. Frost engaged Colonel Michael Looney, an attorney practicing in Washington, D.C. and familiar with government contracts, to examine them and advise whether they could be performed by other contractors (Tr. 377).

 Mr. Frost wanted Redmond to undertake performance on both contracts (Tr. 98). Despite a working relationship between Redmond and Russell beginning in June, 1951 (Exs. 8, 52a), Redmond expressed reluctance to assume Russell's manufacturing duties under the synchro contract (Tr. 96-97, 333, 378). However, during the summer of 1951, an agreement was reached between Russell and Redmond whereby Redmond agreed to carry out the production of gyro motors called for by Contract 947 (Tr. 97-98; 307-8).

 Redmond had been advised by Colonel Looney that there would be no problem in performing under the Russell gyro contract (Ex. 2) if the Navy would accept them (see Tr. 315), but the then current Navy Regulations required a transferee of a Navy contract to take over all other contracts the Navy had with the transferor (Tr. 378-80; cf. Ex. 16-7). Russell was apparently unable to secure Redmond's consent to undertake Russell's manufacturing duties on the "synchro" contract (Tr. 334-35).

 Pursuant to Redmond's agreement with Russell to perform on Contract 947, Russell transferred its machinery for the production of the gyro motors to Redmond in the fall of 1951 (Tr. 98, 315; Exs. 9-10, 12-14).

 NOP was informed by a series of letters between Russell and NOP, and NOP and Redmond, written between July and September, 1951, of some relationship between Russell and Redmond with respect to Contract 947 (Tr. 32-33; Exs. 8-14).

 Overall, this correspondence indicated that Russell had been purchased by Redmond stockholders; Russell's facilities were being consolidated with Redmond's in Owosso, Michigan; and Redmond would take over production of the gyro motor.

 Specifically, Russell stated to NOP in a letter dated July 2, 1951 that effective June 1, 1951, Russell had been purchased by Redmond stockholders. "Since this was not a direct purchase by * * * Redmond * * * Russell will continue to operate as a separate company for the present" (Ex. 8). Russell explained how it would be working closely with Redmond and stated "[it] is planned that this association will help us be of greater service to you in the future" (Ex. 8).

 By letter dated August 24, 1951, Russell informed NOP that (Ex. 9):

 
* * * business conditions have made it necessary to consolidate the facilities of Russell * * * with those of * * * Redmond * * *. Present plans call for the cessation of all operations in the Russell * * * plant on November 1, 1951. Every effort will be made to insure no delay or interruption of shipments required to fill customer schedules. * * *

 Russell closes by expressing confidence that Redmond "will satisfactorily serve you in all respects."

 While this letter announces future "service" by Redmond, it does not state that Russell wants to be or considers itself thereby relieved of its responsibilities under Contract 947. Indeed, Russell's letter assures performance, albeit from "consolidated facilities" at a manufacturing plant other than the one it had designated in its contract with the Government (Ex. 2, p. 6; Ex. 9).

 Redmond phrased the matter in other terms. By letter to NOP dated August 29, 1951 (Ex. 10), Redmond declared that "Russell * * * is being eliminated and all manufacturing facilities are being moved to * * * Redmond * * * at Owosso * * *." Redmond requested that Contract 947 be "[re-issued]" to it so "paper work can be handled under the proper manufacturer's name." Redmond further assured NOP that work on drawings and production tooling was being continued (Ex. 10).

 NOP responded promptly. By letter dated September 5, 1951, NOP wrote Russell, with a copy to Redmond, acknowledging Russell's letter of August 24 and advising

 
that the subject contract [947] exists between the Government and * * * Russell * * * and that no other outside party can be considered a party to the contract irregardless of the financial or organizational changes made by the Contractor. The Government cannot relinquish its rights under the contract and must hold the Russell Electric Company to its agreement to deliver at the time specified. If * * * Russell * * * cannot deliver the motors contracted for and so notifies this plant in writing, then the contract will be terminated for default * * *. [Ex. 11] [Emphasis added]

 This letter further pointed out that neither a satisfactory sample nor the 500 motors due August 15, 1951 had been delivered. Added delay was unacceptable since, as NOP viewed it, the need for the motors "was becoming acute." Russell was thus asked in unambiguous terms to notify NOP immediately if it intended to complete its contract and if so, when deliveries could be expected.

 No reply to NOP's letter of September 5 (Ex. 11) from Russell was forthcoming. However, on September 10, 1951 Redmond wrote NOP (Ex. 12) explaining that the consolidation of Russell activities within Redmond plants would cause difficulties for Russell customers "because of problems not clearly understood at this time." Without more, Redmond asked NOP's indulgence and, to aid in the transition, a cancellation of "purchase orders" placed with Russell and their reissuance on Redmond. *fn4"

 Redmond, furthermore, undertook to answer NOP's letter to Russell (Ex. 11) dated September 5, 1951. Redmond reported to NOP by a letter dated September 20, 1951, that an inspection of Russell's files showed about 85 percent of tooling completed, with the balance to be furnished by November 1st. Redmond stated that "[with] the purchase of the Russell Electric Company, we are endeavoring to fulfill all of their commitments, including delivery promises to their customers." (Ex. 13).

 Moreover, Redmond indicated that manufacturing would begin in mid-November, 1951 and that production was likely to start at the rate of 150 motors per day in late November (Ex. 13). We note that production at that rate would not make unreasonable, as of late September, 1951, the expectation that substantial performance on Contract 947 could be had by January 31, 1952, the final delivery date under Contract 947.

 In its letter of September 20th [Ex. 13], Redmond asked NOP to "[initiate] whatever paper work is necessary to have the contract [947] transferred * * *" to Redmond (cf. Exs. 10, 12, 14).

 NOP correctly understood, and Redmond had earlier been advised, that Navy Regulations then in force required the execution of a novation agreement to assign or transfer a contract from a contractor to a third party (Exs. 16, 17; Tr. 38-42; 200-03; see Ex. 18; Tr. 143).

 NOP had written the Bureau of Supplies and Accounts (hereinafter BSA) on September 18, 1951 requesting it to use its authority to execute a novation agreement (Ex. 15-17; Tr. 37-40). In so writing, NOP stated its view that Redmond had purchased Russell and that the latter had one active contract pending at NOP (Ex. 15).

 Also on September 18, 1951, NOP wrote Redmond that steps were taken to have a novation agreement executed and advised Redmond to expect a communication from BSA (Ex. 18). *fn5"

 BSA wrote Russell on September 25, 1951 and requested information with respect to its other Navy contracts (Ex. 19). The Navy apparently maintained no central file of its contract awards (Tr. 44).

 Although deliveries under Contract 947 began in October, 1951, no answer had been received to BSA's letter of September 25 (Ex. 19). NOP wrote Redmond on December 4, indicating that Russell had failed to answer and requested a prompt reply (Ex. 20). Two days later, BSA again wrote Russell seeking information regarding Russell's contracts with the Navy and certain corporate documents (Ex. 21). A copy was sent to Redmond.

 It was BSA's understanding that Russell's corporate charter had been amended and its name changed (Ex. 21; see Ex. 17). NOP itself reasonably lacked precise understanding of Russell's intercorporate dealings with Redmond (Ex. 23, Para. 1; see Ex. 12). Redmond itself acknowledged to NOP by letter dated January 3, 1952 (Ex. 22):

 
You have been advised that * * * Redmond * * * has purchased * * * Russell * * * of 4501 South Western Boulevard, Chicago, Illinois, and although we commonly refer to the transaction as such, this is not true in all details. * * * Russell * * * was purchased by one of the major stockholders of * * * Redmond * * * and will continue to operate a business office at 332 South Michigan Avenue, Chicago, Illinois * * *. *fn6"

 Neither Russell nor Redmond, however, supplied the information requested (Ex. 1, Para. 28). Russell urges its failure to do so as consistent with its purported abandonment of Contract 947 in the fall of 1951. Further, Russell explains Redmond's failure on the ground Redmond did not want to be substituted on the synchro contract. *fn7"

 There is, nonetheless, no persuasive evidence that NOP, prior to late August, 1952, knew or could reasonably be expected to know that Russell had intended or did repudiate or abandon Contract 947; or, that it knew or could be reasonably expected to know, before the summer of 1952, if ...


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